content

Beware Before Establishing a Company: 10 Legal Mistakes That Could Cost Entrepreneurs Dearly

Establishing a company in Saudi Arabia is no longer simply a matter of obtaining a commercial registration and starting business operations. It requires a number of legal and regulatory decisions that may later affect company ownership, relationships among partners, management, liabilities, contracts, expansion, and investment.

The new Saudi Companies Law and its Implementing Regulations came into effect on January 19, 2023, introducing provisions aimed at facilitating the establishment and sustainability of companies while providing greater flexibility for entrepreneurs and small and medium-sized enterprises.

However, the ease of completing incorporation procedures electronically does not mean that the decisions made before establishing a company can be taken casually.

Below are 10 common legal mistakes that entrepreneurs should consider before establishing a company in Saudi Arabia.

1. Choosing the Legal Form of the Company Without Proper Consideration

One of the first decisions that should be made is selecting the appropriate legal form for the company.

The Saudi Companies Law provides for several forms of companies, including:

Limited Liability Company (LLC).
Joint Stock Company (JSC).
Simplified Joint Stock Company.
General Partnership.
Limited Partnership.

The legal, administrative, and financial implications may vary depending on the form selected.

For example, a limited liability company has a separate legal personality and is responsible for its own debts and obligations. A partner’s liability is generally limited to the extent of their contribution to the company’s capital, subject to the provisions of the law.

Common Mistake

Choosing a legal form simply because it is the most commonly used, without considering key factors such as:

Number of partners – nature of the business – management structure – financing – future expansion – nature of liability.

Best Practice

The nature of the business and its current and future objectives should be carefully considered before selecting the appropriate legal form.

2. Establishing a Company With a Partner Without Regulating the Relationship Between the Partners

A partnership may begin between friends, relatives, or individuals who have a high level of trust. However, problems often arise once the business starts generating profits or when partners have differing views regarding management or expansion.

The following questions should be addressed from the outset:

Who owns each share?
Who manages the company?
How are decisions made?
How are profits distributed?
What happens if the partners disagree?
What happens if one partner wants to exit?
Can a new partner join the company?
How will the sale or transfer of shares be handled?

The Companies Law allows flexibility in including special provisions and conditions in the company’s Articles of Association or bylaws, subject to the applicable legal requirements.

Common Mistake

Relying solely on personal trust and relationships between partners without clearly documenting their respective rights and obligations.

Best Practice

The relationship between the partners should be regulated from the beginning, with clear provisions governing rights, obligations, decision-making mechanisms, and exit arrangements.

3. Failing to Draft Articles of Association That Reflect the Nature of the Business

The company’s Articles of Association are not merely a document required to complete the registration process. They are one of the key documents governing the relationship between the company and its partners.

Leaving important matters unregulated may result in future disputes or difficulties in dealing with unforeseen circumstances.

Matters That Should Be Considered

Ownership – management – authority – decision-making – profits – shares – exit arrangements – admission of new partners – matters relating to individual partners.

Common Mistake

Using a general template or wording that does not reflect the actual nature of the business or the relationship between the partners.

Best Practice

The Articles of Association should reflect the actual structure and agreements of the business, and their provisions should be carefully reviewed before approval.

4. Choosing the Company’s Business Activity Without Verifying Regulatory Requirements

Not every business activity can be commenced simply by establishing a company.

Certain activities may require a license or approval from a competent authority, depending on the nature of the activity and the relevant regulatory body.

Common Mistake

Establishing the company first and only later discovering that the selected business activity requires additional licenses, approvals, or regulatory requirements.

Best Practice

Before incurring incorporation costs or preparing to launch the business, entrepreneurs should verify:

Business activity + regulatory authority + licenses + requirements + activity-specific conditions.

This is particularly important for regulated activities or businesses subject to professional, technical, or regulatory requirements.

5. Neglecting Intellectual Property When Establishing the Business

An entrepreneur may invest substantial amounts in:

Brand name.
Logo.
Visual identity.
Website.
Application.
Content.
Software.
Designs.

The business may then begin using these assets commercially without establishing an appropriate strategy for protecting its intellectual property rights.

It is important to distinguish between trade names, trademarks, copyrights, software, inventions, and other intellectual property rights.

Common Mistake

Treating intellectual property assets merely as marketing elements without considering their legal and commercial value.

Best Practice

Identify the intellectual property assets on which the business relies, determine ownership, and review the appropriate protection mechanisms and related contracts from the early stages of the business.

6. Failing to Determine Ownership of Work Created by Employees and Contractors

What happens if a developer creates the company’s application?

What happens if a designer creates the company’s visual identity?

What happens if a marketing agency produces all of the company’s advertising content?

One common mistake is assuming that paying for the work automatically resolves all intellectual property ownership issues.

Accordingly, agreements with employees, developers, designers, freelancers, and agencies should be reviewed, and the relevant rights and obligations should be clearly defined according to the nature of the relationship and the work performed.

This is particularly important for technology and marketing companies and businesses that rely on software, content, designs, databases, and creative works.

Best Practice

Clearly define the rights relating to deliverables and completed work, the scope of their use, and ownership of the relevant rights, in accordance with the contractual relationship and applicable laws.

7. Failing to Establish a Clear Exit Arrangement

Partners often spend considerable time thinking about how to establish the company, but may overlook an important question:

What happens if one of us wants to leave the company?

An exit is not merely a financial matter. It may involve the transfer of shares, admission of a new partner, valuation of a partner’s interest, or restrictions contained in the Articles of Association or applicable legal framework, depending on the company’s legal form and the circumstances involved.

Common Mistake

Leaving exit arrangements until a dispute occurs, and only then attempting to find a solution while the partners’ interests may already be in conflict.

Best Practice

Potential exit scenarios should be considered from the outset, with appropriate mechanisms established for dealing with a partner’s departure or transfer of their shares in accordance with the applicable law and the company’s structure.

8. Ignoring Conflicts of Interest and Management Authorities

As a company grows, a lack of clarity regarding powers and responsibilities may become a source of legal and operational problems.

Questions that should be addressed include:

Who has authority to sign contracts?
Who represents the company before third parties?
Who has authority over financial decisions?
Which decisions require the partners’ approval?
What are the limits of the manager’s authority?
How should conflicts of interest be handled?

Company incorporation procedures include providing management information and company documents, highlighting the importance of organizing these matters from the incorporation stage.

Common Mistake

Granting broad powers without clearly defining their limits or establishing appropriate oversight mechanisms.

Best Practice

Authorities, responsibilities, and decision-making mechanisms should be clearly defined in a manner appropriate to the company’s size and business activities.

9. Failing to Consider the Future Admission of an Investor or New Partner

A business may initially be established by one person or two partners and later require:

An investor – financing – a strategic partner – an increase in capital – expansion.

If the company’s legal structure is not suitable for its intended growth, amendments and additional procedures may become necessary later.

Common Mistake

Choosing the company’s legal structure and ownership arrangements based solely on its current needs without considering its future growth plans.

Best Practice

Entrepreneurs should ask themselves before incorporation:

Where do I want the company to be in the coming years?

A well-structured company should not be designed solely around its current circumstances. Its future growth, expansion, and potential admission of investors or new partners should also be considered.

10. Treating Company Incorporation as Merely an Electronic Procedure

Many companies in Saudi Arabia can now be established electronically through the Saudi Business Center platform. The incorporation process includes selecting the company’s legal form and entering information relating to the company, partners, management, and Articles of Association, followed by completing the relevant incorporation procedures and issuing the required documents.

However, the ease of completing the application electronically does not mean that the decisions entered into the application are simple or without significant consequences.

The choice of legal form, business activity, ownership, management, authorities, and the wording of the Articles of Association may all have implications for the company after it begins operating.

Common Mistake

Treating the incorporation application as nothing more than a series of electronic steps to be completed as quickly as possible.

Best Practice

Company incorporation should be viewed as a legal and strategic stage, rather than merely an electronic procedure.

How Can Entrepreneurs Avoid These Mistakes?

Before establishing a company, it is useful to prepare a checklist covering the following areas:

First: The Business

What business activity will the company conduct? Are there any special regulatory or licensing requirements?

Second: The Partners

Who are the partners? What percentage of the company will each own? What rights and obligations are associated with their ownership?

Third: The Legal Form

Which legal form is most appropriate for the nature of the business, number of partners, and growth plans?

Fourth: Management

Who will manage the company? What are their powers and limitations? How will important decisions be made?

Fifth: Articles of Association

Do the Articles of Association reflect the actual agreement between the partners? Do they regulate matters that could potentially lead to future disputes?

Sixth: Intellectual Property

Have the trademarks, content, software, designs, and other intellectual property assets been identified? Who owns the relevant rights?

Seventh: Exit Arrangements

What happens if one of the partners wants to sell their interest or leave the company?

Eighth: Expansion

Does the selected structure allow for future expansion and the admission of investors or new partners as needed?

Why Is the Pre-Incorporation Stage Important?

Some problems that arise after a company has been established originate from decisions made at the very beginning.

It may start with an unsuitable legal structure, imprecise drafting of the Articles of Association, unclear partner authorities, or failure to verify the requirements applicable to the business activity. As the business grows, these issues may develop into disputes, additional costs, or the need to restructure the company or reorganize certain aspects of its relationships.

The new Companies Law introduced a more flexible framework for regulating companies and supporting their sustainability, including provisions addressing incorporation, operation, exit arrangements, and other matters relating to companies.

Accordingly, legal planning at the pre-incorporation stage may help entrepreneurs identify and address potential issues at an early stage, before they develop into more complex and costly problems.

Conclusion

Establishing a company is an important step, but it is equally important to establish it on a clear legal foundation that suits the nature of the business and its future objectives.

The key mistakes entrepreneurs should be aware of include:

Choosing the legal form without proper consideration.
Failing to regulate the relationship between partners.
Neglecting to prepare appropriate Articles of Association.
Choosing a business activity without verifying its requirements.
Neglecting intellectual property protection.
Failing to determine ownership of work created by employees and contractors.
Ignoring exit arrangements.
Failing to clearly define management authorities.
Failing to prepare for future investors or new partners.
Treating incorporation as merely an electronic procedure.

Obtaining legal advice before incorporation may help entrepreneurs identify potential issues at an early stage, rather than dealing with them after the business has commenced operations and a dispute has arisen.

Suleiman Al-Omari Law Firm & Legal Consultancy

Suleiman Al-Omari Law Firm & Legal Consultancy provides legal and advisory services to entrepreneurs and business owners in matters relating to company incorporation, selection of the appropriate legal form, drafting and reviewing Articles of Association, regulation of partner relationships, corporate governance and authorities, commercial contracts, intellectual property, and regulatory matters related to business activities, in accordance with the laws and regulations applicable in the Kingdom of Saudi Arabia.

If you are planning to establish a company or enter into a business partnership, conducting a legal review of the business structure and the relationship between the partners before incorporation may help identify regulatory requirements, organize rights and obligations, and reduce the likelihood of future disputes or legal complications.

📞 Contact & Legal Consultations

+966 53 777 8130

Contact us via WhatsApp

⚖️ Important Disclaimer

The information contained in this article is provided for general educational and awareness purposes only. It does not constitute legal advice and should not be considered a final legal opinion regarding any specific company, business, or individual case.

Requirements, procedures, rights, and obligations relating to company incorporation and management may vary depending on the company’s legal form, nature of the business activity, number of partners, ownership percentages, management structure, required licenses, contractual arrangements, and the laws and regulations in force in the Kingdom of Saudi Arabia.

The information contained in this article should not be relied upon to take any incorporation, contractual, or administrative action without reviewing the specific circumstances and relevant documents with a qualified lawyer or legal consultant.

References to laws, procedures, or government services in this content do not replace the need to consult updated official sources or the competent authorities to verify the requirements and procedures applicable at the time an action is taken.

Suleiman Al-Omari Law Firm & Legal Consultancy shall not be held responsible for any decision or action taken solely in reliance on this content. Each company and business is subject to an independent assessment based on its specific circumstances, documents, and business activities.